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Pension funding relief measure with lawmakers

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Pension funding relief measure with lawmakers

WASHINGTON—Congressional negotiators are trying to hammer out an agreement that would temporarily allow employers to use higher interest rates in valuing pension liabilities, cutting employers' plan contributions by billions of dollars over the next few years.

Washington observers say a final agreement could emerge as early as this week, though they caution that such an agreement still is not certain.

“Both sides are trying very hard to reach an agreement. Everyone understands the huge negatives on employers and the economy resulting from the use of artificially low interest rates to value plan liabilities,” said Lynn Dudley, senior vp-policy at the American Benefits Council in Washington.

If an agreement is reached, the pension interest rate provisions would be attached to a highway funding bill, S. 1813, that the full Senate could consider this week.

It isn't clear yet—assuming the Senate passes the measure—if the House of Representatives would take it up or develop its own bill.

A key factor motivating congressional interest in the issue is revenue. If employers are able to reduce the amount of their pension plan contributions, which are tax-deductible, they would have higher taxable income.

Additionally, if companies can cut back on pension plan contributions, they would have more money to make investments, for example in new equipment and facilities, which in turn would boost the economy, observers note.

Details in the legislation could change, but employers would continue to value plan liabilities based on interest rates averaged over 24 months on top-rated corporate bonds for three different segments. Segments refer to when benefits are paid to plan participants.

Under this methodology, interest rates on bonds with maturities of up to five years are used to value pension benefits that will be paid within the next five years, while interest rates on bonds with longer maturities are used to value pension benefits paid over the next five to 20 years, and benefits paid beyond 20 years.

The actual interest rate for each segment though, would have to be within 10% of the average of such segment rates for the 25-year period preceding the current year, at least temporarily.

Because interest rates years ago were much higher—especially on short-term bonds—such a change would result in the use of a much higher interest rate to value liabilities. That would reduce the value of the liabilities and the amount employers would have to contribute to their plans.

Using this methodology could push up the interest rate used to value benefits paid over the next five years by roughly three percentage points, with smaller, though still significant, percentage increases for benefits paid out beyond five years, experts say. That, in turn, would dramatically reduce the value of liabilities and required contributions.

Employers already have had to substantially boost contributions to their pension plans during the past few years, due at least in part to low interest rates. Towers Watson & Co. estimated that employers this year will contribute more than $190 billion to their pension plans, more than double the amount they contributed in 2010.

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Low interest rates are requiring employers to contribute far more into the plans than is necessary, experts say. “The liabilities are way overstated,” said Alan Glickstein, a senior Towers Watson retirement consultant in Dallas.

“The impact of lower interest rates has been felt by all,” said Steve McGivney, a principal with PricewaterhouseCoopers L.L.P. in New York.

“Plan sponsors are being punished by incredibly low interest rates,” said Heidi Rackley, a partner with Mercer L.L.C. in Seattle.

And the money that is flowing into pension plans means companies have less cash to invest in their operations and facilities, said Eric Keener, a partner with Aon Hewitt in Norwalk, Conn.